John Coates: Stress hormones are making bankers more risk averse - Full WIRED Health talkWired UK

Stress hormones such as cortisol create a physical response that
makes people risk averse, said stock market trader turned
neuroscientist John Coates, speaking at Wired
Health.

Coates is studying the impact of certain hormones -- including
testosterone, cortisol and adrenaline -- on people working in
finance to see how it affects their risk appetite.

Coates left his job as a city trader in order to study bankers
at Cambridge University. "I became increasingly disillusioned with
explanations we had for the pathologies of risk-taking on Wall
Street which, unfortunately, everyone outside of Wall Street has to
live with," he said, adding that people assume that risk taking is
a "purely cognitive activity", something that Coates sees as a
"profound error". From personal experience when banking he knew
that taking financial risk was a "physical roller coaster ride" but
this wasn't being studied effectively.

This led Coates to study financial risk taking as no different
from any medical pathology, studying traders "in the wild" and then
taking observations back to carry out further work at Addenbrookes
Hospital.

The financial markets made for a "beautiful venue in which to
study not just financial risk taking, but work on a model of
workplace stress," he explained. This is because the data in
finance is "so clean". "If you wanted to study stress on lawyers or
doctors, it would be hard to come up with an index. In finance you
have profit, loss, risk, volatility of the market, expected
volatility of the market. These are very clean numbers."

Stress is known to be caused by novelty, uncertainty and
uncontrollability, so Coates and team were able to look at these
factors in finance and compare them with hormone levels while
tracking the performance of traders to see how "information [about
how the markets are doing] can make people sick".

He explained how information on its own is enough to trigger a
stress response. "We all think [stress] is a psychological
phenomenon. It's not. It's merely a physical preparation for
impending physical activity."

When under stress, adrenalin and cortisol will suppress the
digestive system and reproductive tract ("you don't need to have
sex when fighting off a grizzly bear!"). It also suppresses the
immune system and in the long term it mobilises energy for
immediate use to provide "fuel to power you through whatever
challenge you are going through".

To test how uncertainty affected stress levels, Coates looked at
the variance of trading profitability versus cortisol levels. "More
uncontrollability in trading results resulted in higher cortisol
levels," he said. He also looked at uncertainty about the future --
looking at the implied volatility of the German bond market -- and
found that cortisol rises with volatility as much as 68 percent
over two weeks.

The team then tried to replicate the results using non-banking
volunteers, injecting patients so that their cortisol levels
matched that of the traders. They then gave them a risk-taking task
in order to plot how their risk-taking preferences changed and
found that their "risk preferences collapsed" -- their appetite for
risk decreased by 44 percent under stress."

"It's not surprising that the stress response [during the financial crisis] led to what mounted to a medical crisis as
well as financial one. There was a dramatic spike in depression and
cardiovascular disease in London," Coates explained.

The problem is that traders are completely unaware of the
changes in their risk profile that is taking place, and standard
economic models don't factor this in. "Shifting risk preferences
are neither rational nor irrational," he said, "it's silently
shifting risk preferences causing excessive risk taking on the way
up and risk aversion on the way down."

Unsurprisingly, there has been "enormous corporate interest" in
this research, as banks want to optimise the performance of staff
and manage risk. Combining wearable tech with this sort of research
will allow us to monitor human performance in more sophisticated
ways. "You need to know yourself, and that increasingly means know
your biochemistry," Coates concluded.